CONGRESS TAKES A LOOK AT RENT-TO-OWN COMPANIES

Chrystal Caruthers, Congressional QuarterlyCHICAGO TRIBUNE

Low-income consumers are paying thousands of dollars to rent-to-own businesses that operate in a regulatory "no-man's land" and lure shoppers who do not qualify for credit cards with the promise of low rates and easy payments for home furnishings and appliances, leaders of the House Banking Committee were told last week.

"Through rent-to-own, a poor woman pays $1,200 for a $400 television set that a rich man can buy on credit for $450 (including interest)," said Banking Committee Chairman Henry B. Gonzalez (D-Texas).

"This is an industry that clearly markets to the more needy and unsophisticated consumer. The result is that those who can least afford to pay excessive prices for goods end up doing so through rent-to-own."

"I didn't understand I was paying so much money," said Irene Muldrow of Minneapolis. She said she has paid $2,500 for furniture that retailed for $1,000 and still doesn't own it.

"They take advantage of people who don't read that good," she said.

Charges called unfair

Representatives of the rental-purchase industry said critics were mischaracterizing their business, which served more than 3 million customers at 7,500 stores and generated $3.6 billion in revenues in 1991.

"Most transactions last three months or less, and the customer returns the property with no further obligation," said Bill Keese, executive director of the Association of Progressive Rental Organizations, the industry's national trade association.

"Rental customers are never obligated to keep making payments. That's why the transaction is not a sale. The transaction bears no interest because the customer never goes into debt. We think there is a fundamental difference between being in debt and not being in debt," said Keese.

Representatives of public interest groups said the rent-to-own industry targets low-income consumers.

"Nearly 60 percent of Rent-A-Center customers have incomes under $20,000 a year," said David L. Ramp, a staff attorney for Mid-Minnesota Legal Assistance Inc., referring to a Wichita, Kan.-based chain from whom Muldrow bought her furniture. "Only 4 percent of customers have annual incomes in excess of $45,000 a year."

"Consumers rent-to-own only because they don't know any better," said Ed Mierzwinski, for the U.S. Public Interest Research Group. "The stores don't disclose the interest rate or true cost of their contracts and claim that they aren't required to do so."

Rep. Joseph P. Kennedy II (D-Mass.) said, "These transactions are taking place in what is practically a regulatory no-man's land." He noted that rental centers tend to fall between the cracks because most courts have held that rent-to-own transactions are neither credit sales nor leases, which exempts them from the Truth in Lending or Consumer Leasing Acts.

Getting around the law

Currently, 34 states have passed comprehensive consumer protection legislation in an attempt to regulate the industry, but witnesses complained that the companies are using "smoke screens" to sidestep these laws.

The Public Interest Research Group conducted a survey of five states (California, Illinois, Massachusetts, Maryland and New York) and found rental centers charging customers annual percentage rates ranging from 46 percent in Chicago to 323 percent in Albany, N.Y.

"In Harrisburg, a TV/VCR combination, at $17.95 per week, for 100 weeks, would cost $1,795. Because the fair market value of this product is approximately $600, the remaining $1,195 is interest for an annual interest rate of 104 percent," said Pennsylvania Atty. Gen. Ernest D. Preate Jr., describing results of an undercover investigation.

Pennsylvania is the only state that expressly includes terminable rent-to-own agreements under its Goods and Services Installment Sales Act. But that hasn't prevented abuses.

"Despite our best efforts, I must report that rent-to-own transactions are one of the biggest ripoffs in my state and across the nation," said Preate.

The committee was urged to amend the Federal Truth in Lending Act to expand the definition of "credit sale" to include rent-to-own transactions; to provide for plain-language contract agreements; and to mandate oral disclosure of key provisions, such as total cost, interest rate, whether a product is new or used, the amount of late fees and grace periods.